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  • Writer's pictureRoch Clapp

Tips on a Successful Business Transition

According to the U.S. Small Business Administration (SBA), 28 million small businesses in America account for 54% of all U.S. sales.  The SBA has also found that the number of small businesses in America has increased 49% since 1982.  With the growth of small businesses, it is possible you have been one of the entrepreneurs who own a small business or an interest in a small business.  As part of the estate and financial planning process, it is important to provide for continuity or transition of these business interests sometimes on a larger scale than for other assets you might own.  The successful transition takes thoughtful analysis and planning, but can provide certainty for your heirs and employees. Business succession is commonly a fact finding and goal identification process.  The following information or questions may assist the small business owner and the advisors develop a successful succession plan.

  1. Emergency Management Plan.  Often the small business owner has kept pieces of fundamental information regarding operating the business in unwritten form out of habit of handling these affairs on a routine basis.  Start the succession process by developing an "emergency management plan" in the event the proverbial bus strikes before the succession is accomplished.  Should the business be liquidated or sold?  Who are key employees that need to be consulted?  Are there vendor or banking relationships that may be in default as a result of a death or unavailability of the owner?  Is there an industry expert who should be retained?  Use the emergency plan to start thinking about weaknesses and strengths in the operation of the business as this may guide future planning efforts.

  2. Family v. Outsiders.  Will the business be transitioned among employees, sold to an outsider or competitor, or retained in the family unit?  Pick the best solution for the business, not the expectation of any of these individuals.  If the business will be kept in the family, will the family member be expected to purchase the interest or will all or part be a gift?  If there are family members who are not involved in the business, does there need to be an equalization through the estate distribution?  Should the family members hold non-voting or other limited ownership interests?  Should the family member involved in the business be rewarded for helping grow and develop the business so there may be "unequal" distribution of assets.  Be honest about the abilities of the successor - a desire to own a business does not equate to the ability to run a business.  If any portion is gifted, does a marital agreement need to be prepared to keep the spouse from claiming an interest in the business?  Should non-compete or confidentiality agreements be put in place?

  3. Agreements and Intellectual Property.  Are there lines of credit, loans or bonds that rely upon the credit of the business owner?  If so, can the successor meet these financial responsibilities to keep these loans or bonds in place?  Are there franchise agreements or vendor contracts that need approval for transfer?  Are there intellectual property rights that need to be documented and protected?

  4. Timing and Cash Flow.  Will the transition happen over time or be a one time event?  Be careful of voting power if the transition will take place over time.  Should the business be divided into different regions or product lines?

With careful insight of the business operations, owners goals, and family dynamics, a successful transition and succession plan can be developed. This article is not intended to replace legal advice applicable to your situation and should be used only for informational purpose.  Consult with your legal or tax advisors before implementing any suggestions contained herein.  Sincerely,

Sandra L. Clapp

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